Moody's assigns stable outlook on Nigerian banking sector

Moody's Investors Service has projected a stable outlook for the Nigerian banking sector, with the expectation that bank ratings will remain constant over the next 12 to 18 months. Akin Majekodunmi, Vice President and Senior Analyst at Moody's, highlighted several factors contributing to this positive forecast during an interview on CNBC Africa. One of the key factors mentioned was dollar liquidity. In the past year, Nigerian banks faced significant challenges due to a lack of dollar liquidity, stemming from lower oil-related deposits, the implementation of the Treasury Single Account, and an overall economic downturn that resulted in a contraction of the economy by 1.5%. However, improvements have been noted in 2017, with the central bank injecting over three billion dollars into the private sector, leading to increased banking liquidity. Additionally, rising oil prices and a more stable forex market have boosted investor confidence, potentially attracting foreign investments back into the banking sector. Another area of focus was asset risk, particularly non-performing loans (NPLs), which stood at 14% as of December 2016. While pressures on NPLs persist, Moody's anticipates that the NPL ratio will remain between 14% and 16%. Capital sensitivity to currency fluctuations was also noted as a potential challenge, with expectations of some contraction in capital levels. Despite these factors, Moody's emphasized that the supportive regulatory environment for banks in Nigeria has contributed to the overall stable outlook. Discussing the broader economic landscape, Majekodunmi shared insights on Nigeria's GDP growth projections. After a 1.5% contraction in 2016, a recovery to 2.5% is anticipated for the current year, driven by increased oil production and investments in infrastructure projects. Looking ahead to 2018, a further expansion to 4% GDP growth is expected, indicating a positive trajectory for the Nigerian economy. The conversation also touched on foreign exchange (FX) dynamics and the Central Bank of Nigeria's efforts to bolster dollar availability. The recent injection of funds into the private sector has helped align parallel and interbank market rates, reducing uncertainties for investors and potentially attracting foreign capital inflows. Despite lingering investor caution, gradual market improvements, including a strengthened Naira and economic growth prospects, are seen as favorable conditions for boosting liquidity in the banking sector. When questioned about the timing of potential policy changes regarding forex controls, Majekodunmi noted that the ongoing gradual easing of restrictions and improved liquidity in the market have been positive developments for the banking industry. He acknowledged that while challenges such as high interest rates persist, forecasts suggest a lowering of inflation rates to single-digit figures, signaling a positive trend for the banking sector. In conclusion, Moody's assessment underscores an optimistic outlook for the Nigerian banking sector, supported by improving economic indicators, increased liquidity, and a favorable regulatory environment. While uncertainties remain, the projected stability in bank ratings and the anticipated growth in key sectors bode well for the resilience and growth potential of Nigeria's banking industry.